2014 (11) TMI 444 - AT - Income Tax

Violation of section 13(1)(d) r/w Section 111(2) and 11(5) - Benefits on the portion of the income attributable to impermissible securities to be taxed at maximum marginal rates - Whether the trust was obliged to convert its TISCO share holding into specified securities by the due date or thereafter Held that - The trust should had converted the TISCO share into investment of permissible securities in this behalf - the provisions of secs. 11, 12, 13 and 16(2) are to be conjointly read and the CBDT circular referred to above being a beneficial circular is to be also applied - A combined reading leads to a harmonious construction, proviso to section 164(2) is very important, Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate - Section 164 (2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes - This is subject to application of other provisions of Act like exemptions, deduction etc. - a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt u/s 11 or section 12, because of the contravention of section 13(1)(d), then tax shall be charged on such income or part at the maximum marginal rate - only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons. The dividend income being exempt from income by express provisions of sec 10(34), the dividend income is exempt from Income Tax - This being so, in the result there remains no tax liability on the trust - even department has not been taking any particular stand and allowing the benefits of sec 11 and 12 in some of the years, then rethinking and refusing the benefits by reopening the assessments - even the department has its own share of interpretations, leading to repetitive proceedings Decided in favour of assessee.

Issues Involved:
1. Application of Section 13(1)(d) read with Sections 11(2) and 11(5) of the Income Tax Act, 1961.
2. Interpretation of investment and accretion in the context of charitable trusts.
3. Applicability of maximum marginal rate under Section 164(2) due to violation of Section 13(1)(d).
4. Exemption of dividend income under Section 10(34) despite violations of Section 13(1)(d).

Detailed Analysis:

Issue 1: Application of Section 13(1)(d) read with Sections 11(2) and 11(5) of the Income Tax Act, 1961.
The assessee, a charitable trust, was denied exemption under Sections 11 and 12 for the assessment year 2008-09 due to its investment in TISCO shares, which was deemed non-compliant with Section 13(1)(d). The trust argued that the original TISCO shares were received as a donation and not purchased with trust funds, thus not violating Section 13(1)(d). However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the trust should have converted these shares into specified securities by 31st March 1993, failing which the entire income of the trust was subjected to tax at the maximum marginal rate.

Issue 2: Interpretation of investment and accretion in the context of charitable trusts.
The trust contended that the original TISCO shares were part of the corpus received as a donation and that the right shares were an accretion to these original shares. The AO and CIT(A) rejected this argument, stating that the shares were received after 1st June 1973 and thus did not qualify for the accretion clause. The AO also noted that the trust failed to convert these shares into permissible investments, leading to a violation of Section 13(1)(d).

Issue 3: Applicability of maximum marginal rate under Section 164(2) due to violation of Section 13(1)(d).
The trust argued that even if there was a violation of Section 13(1)(d), only the income derived from the non-compliant investment should be taxed at the maximum marginal rate under Section 164(2), not the entire income of the trust. The Tribunal agreed with this interpretation, citing various judicial precedents and CBDT Circular No. 387, which clarified that only the non-exempt portion of the income should be taxed at the maximum marginal rate.

Issue 4: Exemption of dividend income under Section 10(34) despite violations of Section 13(1)(d).
The trust received dividend income from the TISCO shares, which it argued was exempt under Section 10(34) of the Act. The Tribunal upheld this view, stating that the dividend income, being specifically exempt under Section 10(34), could not be taxed even if the trust violated Section 13(1)(d). The Tribunal emphasized that the exemption under Section 10(34) is income-specific and not overridden by Sections 11 to 13.

Conclusion:
The Tribunal allowed the appeal, holding that the entire income of the trust could not be denied exemption under Sections 11 and 12 due to the violation of Section 13(1)(d). Only the income derived from the non-compliant investment (TISCO shares) should be taxed at the maximum marginal rate, and since the dividend income from these shares was exempt under Section 10(34), the trust's overall tax liability was nullified. The Tribunal's decision was based on a harmonious reading of Sections 11, 12, 13, and 164(2), supported by judicial precedents and CBDT circulars.

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